ITAD Ruling No. 011-05

February 16, 2005 ITAD RULING NO. 011-05 Articles 5 & 7, Paragraph 1 (a) of the GADC between GRP and GOA; Sections 108 (B) (3) and 106 (A) (2) (c) of the NIRC of 1997 BIR Ruling No. DA-ITAD No. 219-02; 14-03 Philippines-Australian Basic Education Assistance For Mindanao (Beam II) Torres Street Davao City Gentlemen : This refers to your Note Verbale No. 279/04 File No. MN94/00112 dated September 29, 2004 endorsed to this Office by the Department of Foreign Affairs (DFA), requesting for tax-free local purchases of motor vehicles for the official use of the Philippines-Australian Basic Education Assistance for Mindanao (BEAM II), specifically described as follows: Type of use: Official use Organization: Philippines-Australian Basic Education Assistance for Mindanao Make: Three (3) 2004 Mitsubishi Pajero 4x4 A/T Engine No. and: 6G75-RC9261/JMYLYV77W4J000765 Chassis No. 6G75-RC8024/JMYLYV77W4J000739 6G75-RC1093/JMYLYV77W4J000584 Make: One (1) 2004 Mitsubishi Lancer MX A/T Engine No.: 4G18-AA3095 Chassis No.: MMBSRCS3A4F000210 In reply, please be informed that Section 106 (A)(2)(c) of the National Internal Revenue Code of 1997 (NIRC) provides, viz : "Section 106. Value-added Tax on Sale of Goods or Properties . "(A) Rate and Base of Tax . There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. "xxx xxx xxx "(2) [Zero-rated Sales] The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: "xxx xxx xxx "(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. In this connection, Article 5, paragraphs 1 and 2 of the General Agreement on Development Cooperation (GADC) between the Government of Australia (GOA) and the Government of the Republic of the Philippines (GRP) signed on October 28, 1994 and entered into force on March 12, 1998 provides, viz : "Article 5 "Subsidiary arrangements "1. In support of the objectives of this Agreement, the Government of Australia and the Government of the Republic of the Philippines, or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. "2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements . Wherever possible, such subsidiary arrangements shall set out: (Emphasis supplied) "(a) the name and duration of the activity; "(b) a description of the activity and statement of its objectives; "(c) the nominated implementing agencies in both countries; "(d) potential benefits of the activity; "xxx xxx xxx" Relative thereto, Article 7, paragraph 1 (a) of the GADC between GRP and GOA, pertinently provides, viz : "Article 7 " Project supplies and professional and technical material and services "1. In respect of project supplies and professional and technical material and services whether to be imported from outside or procured within the Philippines, the Government of the Republic of the Philippines shall: "(a) for direct supplies of domestic goods and services, subject then to zero rate for purposes of Value Added Tax (VAT); exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon); and be responsible for inspection fees, storage charges and all other levies, fees and charges; Based on the above-quoted provisions, the terms of the GADC, unless otherwise stated, shall apply to subsidiary arrangements with specific reference to said Agreement. Moreover, Article 7 of the GADC states that GRP shall subject to zero rate, for purposes of VAT, direct supplies of domestic goods and services in respect of project supplies and professional and technical material and services. On the other hand, GRP shall exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon). It is worthy to note that the abovementioned BEAM II was created by virtue of the concluded Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government of Australia on June 27, 2001 pursuant to Article 5 of the GADC. Such being the case, this Office is of the opinion and so holds that since BEAM II is a subsidiary arrangement of GADC, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services of BEAM II are subject to zero rate for purposes of VAT in respect of supplies, motor vehicles and professional and technical material and services provided by the Government of Australia while direct importations of goods are exempt from VAT. (DA-ITAD No. 14-03 dated January 27, 2003) In view of the foregoing, the local purchases by BEAM II of three (3) units of 2004 Mitsubishi Pajero 4x4 A/T and one (1) unit 2004 Mitsubishi Lancer MX A/T, for its official use, are subject to VAT at zero percent rate, pursuant to Sections 108(B)(3) and 106(A)(2)(c) of the NIRC in relation to Article 7 of the GADC. As regards the seller of goods and services to BEAM II, the sales by a VAT-registered entity of goods and services under the above circumstances shall be treated as effectively zero-rated transactions. [Sec 4.100.3, Revenue Regulations No. 7-95] In this jurisdiction, the grant of VAT exemption alone would mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to BEAM II. To enable local sellers to refund the amount of the tax inputted into the cost of goods and services supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of view of the VAT-registered seller, although the sale of goods or services to BEAM II is a taxable transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of the local supplier and the input tax on his own purchase of goods, properties or services related to such effectively zero-rated sale becomes available as tax credit or refund. (VAT Ruling No. 008-00 dated February 7, 2000) HaAIES Treated as effectively zero-rated transactions, the VAT-registered seller of goods or services to BEAM II is required to file an application and secure prior approval for zero-rating to be able to claim tax credit/refund on VAT (input tax) previously paid. The said application shall be filed, before an initial sale, to the Large Taxpayers Audit and Investigation Division II (LTAID II) if VAT-registered seller is a large taxpayer, or to the Audit Information, Tax Exemption and Incentives Division (AITEID) of this Bureau if the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for 12 months from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96). Without prior approved application for effective zero-rating, the transaction which may otherwise be treated as zero-rated shall be considered exempt. Consequently, failure of the part of a VAT-registered seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax credit/refund on the (VAT) input tax passed on to him. [Secs. 4.102-2, 4.103-1 and 4.107-1(d), Revenue Regulations No. 7-95] This ruling is issued on the basis of facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein party is concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group